A change in interest rates affects businesses in the following ways; if the business has loans then an increase in interest rates will mean higher repayments, reducing profits. If the business wants to borrow money to say build new premises, then they are less likely to go ahead with the project when interest rates increase. Customers are going to find that they are more attracted to saving than to spending if interest rates go up and less likely to borrow money to spend as well. This may reduce sales for the business.
Smaller businesses are particularly vulnerable due to their generally high debt and high failure rate. The forecast of the business model is what prompts a bank to issue financing in the first place. If rates rise and consumer spending goes down -- or shifts -- then a bank can call in the loan, demanding full payment. This is enough to create a bankruptcy situation.
New business owners should always calculate the impact of interest rate increases and the possibility that the bank will not continue the facility. Many new businesses cannot access bank loans due to lack of security and lack of a strong trading history (a problem for all startups and new projects). So in the coming days we will be looking at other alternatives financing sources.
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